Glide path for 100% Equity Portfolio

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SpartanBull
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Glide path for 100% Equity Portfolio

Post by SpartanBull » Mon Nov 14, 2016 5:35 pm

I have a question regarding the gradual allocation to bond at advanced ages. To provide some background, I'm 24 years old and 100% equities. That being said, I make a high salary and probably 10% of my assets are in highly liquid vehicles (call it a beefy emergency fund, however you want to look at it). I provide that information just to further indicate that I have no concerns about needing to access my portfolio for Probably another 30 years, maybe 35 years.
All of that being said, I think I'm a solid candidate to have all of my portfolio funds in Equities (2/3 total us, 1/3 total international), which is what I do. That being said, at what ages does that equity portfolio no longer become prudent, even with a very healthy emergency fund? at 40 should a higher bond allocation be considered? 50? I'm looking for some ideas on a general rule of thumb for someone who is basically 100% equities, high earner, etc. Thanks.

MNGopher
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Re: Glide path for 100% Equity Portfolio

Post by MNGopher » Mon Nov 14, 2016 5:43 pm

I think it depends on your own risk tolerance and what your other circumstances are. I'm still about 80/20 equities/bond at age 51, but I will have a decent pension and a larger emergency fund then I really need, so I don't mind a little more risk in my retirement accounts.

KlangFool
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Re: Glide path for 100% Equity Portfolio

Post by KlangFool » Mon Nov 14, 2016 5:50 pm

SpartanBull wrote:I have a question regarding the gradual allocation to bond at advanced ages. To provide some background, I'm 24 years old and 100% equities. That being said, I make a high salary and probably 10% of my assets are in highly liquid vehicles (call it a beefy emergency fund, however you want to look at it). I provide that information just to further indicate that I have no concerns about needing to access my portfolio for Probably another 30 years, maybe 35 years.
All of that being said, I think I'm a solid candidate to have all of my portfolio funds in Equities (2/3 total us, 1/3 total international), which is what I do. That being said, at what ages does that equity portfolio no longer become prudent, even with a very healthy emergency fund? at 40 should a higher bond allocation be considered? 50? I'm looking for some ideas on a general rule of thumb for someone who is basically 100% equities, high earner, etc. Thanks.


SpartanBull,

The short answer:

When you can no longer afford to lose 50% of your portfolio.

The longer answer:

It is dependent on 2 ratios:

A) Portfolio size as compare to your annual expense -> Aka, have you won the game? For example, if your portfolio size is 33X your annual expense, why do you still gamble?

B) 50% loss in equity as compared to your annual savings. For example, when your portfolio is small, it may only take one or 2 years to recover. But, if your portfolio is 50X your annual saving and you lost 50%, you may not have 25 years to recover.

IMHO, the right number is between 75/25 and 25/75. 100/0 is wrong almost all the time.

<< I provide that information just to further indicate that I have no concerns about needing to access my portfolio for Probably another 30 years, maybe 35 years.>>

1) You are young and overly optimistic. Life happened. Are you so lucky that you could be fully employed with high income over the next 30 to 35 years?

2) If you are that lucky, why would you work for 30 to 35 years? Don't you have better thing to do in life than working for money?

KlangFool

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nisiprius
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Re: Glide path for 100% Equity Portfolio

Post by nisiprius » Mon Nov 14, 2016 6:11 pm

Very seriously, I would suggest you think about adding a bond allocation, however small. Keep it so small that you can bear to do it. 10%? If you can't even stand to add 10%, then 5%? The reason is that if you have a bond allocation, it is easy to increase it slowly and gradually, so gradually that you are never agonizing over whether it is "a good time." If you keep it at zero, you are likely to find yourself in a situation where never add them because you are constantly waiting for "the right time."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

young-ish
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Re: Glide path for 100% Equity Portfolio

Post by young-ish » Mon Nov 14, 2016 6:32 pm

SpartanBull wrote:
That being said, at what ages does that equity portfolio no longer become prudent, even with a very healthy emergency fund? at 40 should a higher bond allocation be considered? 50? I'm looking for some ideas on a general rule of thumb for someone who is basically 100% equities, high earner, etc.


U.S. equities were in a drawdown for the first 13 years of this century. That seems like a reasonable worst case scenario to plan for.

Money you need within thirteen years should be invested in assets with less risk than stocks.

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David Jay
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Re: Glide path for 100% Equity Portfolio

Post by David Jay » Mon Nov 14, 2016 6:37 pm

At 24, you have never been through a bear market. There all kinds of quotes about how you don't know your risk tolerance until you have lost 40% of your account balance.

I would recommend an 80/20 asset allocation for two reasons:
1. The risk-adjusted return is better (Google "efficient frontier") and the absolute return is only tenths of a percent less
2. More important: Having bonds during a downturn allows you to rebalance into stocks during a bear market. It is hard to explain the psychological benefit of being able to "do something" during a downturn instead of just having to grin-and-bear-it.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

SpartanBull
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Re: Glide path for 100% Equity Portfolio

Post by SpartanBull » Tue Nov 15, 2016 1:47 am

I'm somewhat in agreement with some of the points suggesting a slight allocation to bonds, whether it be 10%, 20%, etc. Heres my two main issues with that
1) In my 23.5k of available Roth space (5.5 personal plus 18k for solo ira), I feel that investment space to be precious (you only get a limited amount per year), so why would I want to waste a portion of that space on a lower returning asset. Also, with the withdrawal penalties on a roth, wouldnt that further the unlikelihood that I would need fixed income in there for some safety?
2) Based on the nature of roth space (not withdrawing untill 59/60, etc, that would leave the next option of having some bonds in taxable. I've read this to be a killer from a tax standpoint, despite what it may provide as a smoothing of the ride.
It just seems like I'm between a rock and a hard place. Say I decide to move into a modest 10% bond position. What is the most efficient way to do that based on the conundrums described above? Or what is the lesser or the evils? Thanks.

RubyTuesday
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Re: Glide path for 100% Equity Portfolio

Post by RubyTuesday » Tue Nov 15, 2016 4:07 am

You could consider establishing a small fixed income position now by annually buying your allocation of Series I or EE (or both) Savings Bonds, which also expand tax advantaged space, and may be used tax free for education expenses should you have kids needing education in 20 years or so.

Also, with current yields low, if you don't want to waste tax advantaged space for FI, you could use 3 or 5 year CDs. Taxes just not that big a deal at low yields.

Completely agree with points made by others. IMO, 10-20% minimum, but get it started now in any event...

KlangFool
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Re: Glide path for 100% Equity Portfolio

Post by KlangFool » Tue Nov 15, 2016 8:24 am

SpartanBull wrote:I'm somewhat in agreement with some of the points suggesting a slight allocation to bonds, whether it be 10%, 20%, etc. Heres my two main issues with that
1) In my 23.5k of available Roth space (5.5 personal plus 18k for solo ira), I feel that investment space to be precious (you only get a limited amount per year), so why would I want to waste a portion of that space on a lower returning asset. Also, with the withdrawal penalties on a roth, wouldnt that further the unlikelihood that I would need fixed income in there for some safety?
2) Based on the nature of roth space (not withdrawing untill 59/60, etc, that would leave the next option of having some bonds in taxable. I've read this to be a killer from a tax standpoint, despite what it may provide as a smoothing of the ride.
It just seems like I'm between a rock and a hard place. Say I decide to move into a modest 10% bond position. What is the most efficient way to do that based on the conundrums described above? Or what is the lesser or the evils? Thanks.


SpartanBull,

<<2) Based on the nature of roth space (not withdrawing untill 59/60,>>

1) You are wrong! You can withdraw your contribution to the Roth IRA at any time without paying penalty. It is the earning / growth part that you cannot withdraw before 59.5 years old without paying penalty?

<<18k for solo ira)>>

2) What is that? There is no such thing as Solo IRA?? Do you mean Solo 401K? Why are you doing Roth for this "solo ira"? It is a mistake for 90+% of people to do that. You could have contributed to Pre-tax Solo 401K and save a lot of tax.

In summary, you could put your 10% bond in Roth IRA.

KlangFool

Engineer250
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Re: Glide path for 100% Equity Portfolio

Post by Engineer250 » Tue Nov 15, 2016 9:33 am

SpartanBull wrote:That being said, I make a high salary and probably 10% of my assets are in highly liquid vehicles (call it a beefy emergency fund, however you want to look at it).


Surprised no one pointed this out. Most people on here do not like the "bucket" approach. They consider their emergency fund, savings, etc. to be a part of their whole picture. So if you have 10% of total assets in cash than you are actually 90% equities by the way most people on here "count" things.
Where the tides of fortune take us, no man can know.

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JPH
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Re: Glide path for 100% Equity Portfolio

Post by JPH » Tue Nov 15, 2016 10:33 am

Don't think entirely in terms of your age. For me, the bond allocation is for the money I cannot afford to lose. At a young age you can afford to lose a lot because you have time to replace it from future earnings. As most people age they have less earning potential and so less ability to recover from a large loss. But even at a younger age it's easier to start over if you have protected some money that you can use to reenter the market.

Edited to correct a typo
Last edited by JPH on Tue Nov 15, 2016 10:46 am, edited 1 time in total.
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Dulocracy
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Re: Glide path for 100% Equity Portfolio

Post by Dulocracy » Tue Nov 15, 2016 10:34 am

Do not look at it as "what age". Look at it as, "How far from retirement should I..." You see, the date at which you will start drawing down is what really matters. If two 30 year olds are trying to decide when to add bonds, and one will retire at 50, while the other retires at 70, the point at which they add bonds will be different.

Because of large downturns and prolonged downturns, I would say that 20 years out is a good time to have a significant portion of one's portfolio in bonds. Perhaps consider 70/30 at that time. Glide to 60/40 over the next ten years. Either keep moving to 50/50 or sit at 60/40, depending on your strategy. That way, if the big one hits, you have enough in bonds to wait it out.

nisiprius wrote:Very seriously, I would suggest you think about adding a bond allocation, however small. Keep it so small that you can bear to do it. 10%? If you can't even stand to add 10%, then 5%? The reason is that if you have a bond allocation, it is easy to increase it slowly and gradually, so gradually that you are never agonizing over whether it is "a good time." If you keep it at zero, you are likely to find yourself in a situation where never add them because you are constantly waiting for "the right time."


This is a wise and prudent thought. 5% of your portfolio is not much. I have struggled with this very issue in my own portfolio, and I am approaching 40. You may consider doing this now. If you do not do it now, think about it long and hard when you hit 30. Honestly, I wish I had done something like that when I first got started. It would make some of the decisions I wound up making much easier (I am age - 24 in fixed income though a rather complicated formula partially designed to get around my mental block).
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

MIpreRetirey
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Re: Glide path for 100% Equity Portfolio

Post by MIpreRetirey » Tue Nov 15, 2016 1:40 pm

OP;
You've probably thought this way, but I think of the 'glide path' as the glide from savings and return on capital, to the preservation of capital. Ideally, you'd get to there b4 forced retirement. I mean get to your 'number'.
So, with a low balance your contributions are large in comparison, dollar cost averaging effect dominates. After you get sort of too much to risk loss of, or too close to retirement to recoup a loss, with no more contributions, and instead withdrawals, then amount of loss of capital dominates. You have to decide on your own the risk you want to accept. 'What if the market' has been used as a general guideline.
'Some' amount of bonds can help in your outlook behavior and maybe make you more realistic about markets and returns, and let you not get stuck in an all growth only mentality as others might be saying.
Edit: added savings req.

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stemikger
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Re: Glide path for 100% Equity Portfolio

Post by stemikger » Wed Nov 16, 2016 6:33 am

Below is a true life story about what happened to Taylor Larimore (one of the founders of this forum). I printed this out and keep it close to protect me from myself. As you get holder, it might be something you want to look at from time to time. Thankfully Taylor shared it, so we don't have to experience the same pain his family did. Good Luck

Our family owned "Larimore's Diner" in Foxboro, Mass. in 1929 (I was 5 years old at that time). When the depression hit, we lost the Diner and moved into my grandfather's home in Miami. Grandfather, who was a millionaire investor and chief executive of an investment trust company, lost everything--including the Miami home we lived in.

BEAR MARKET OF 1929-1937 (Dow plunged 89%)
-1929--1930--1931--1932
(-31%)(-25%)(-43%)(-08%) Large Cap Stocks
(-34%)(-35%)(-47%)(-06%) Mid/Small Cap Stocks
(-47%)(-38%)(-50%)(-05%) Micro Cap Stocks

(+04%)(+07%)(-02%)(+09%) 5-Year Treasury Bonds

BEAR MARKET OF 1973-1976 (S&P fell 43%)
-1973--1974
(-15%)(-26%) Large Caps
(-39%)(-29%) Micro Caps

---(-70%) Coca-Cola
---(-82%) Intel
---(-73%) McDonald's
---(-86%) Merrill Lynch
---(-86%) Walt Disney
---(-71%) Xerox

Figures cannot convey the horrifying and debilitating effects of a bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom talk is everywhere. Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable. Suicides increase. That's a REAL bear market.

This is why many people in retirement have 40-70% in bonds.

Best wishes.
Taylor
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

Theoretical
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Re: Glide path for 100% Equity Portfolio

Post by Theoretical » Thu Nov 17, 2016 6:09 pm

SpartanBull wrote:I have a question regarding the gradual allocation to bond at advanced ages. To provide some background, I'm 24 years old and 100% equities. That being said, I make a high salary and probably 10% of my assets are in highly liquid vehicles (call it a beefy emergency fund, however you want to look at it).


What kinds of highly liquid vehicles? If its more than a savings account, then I'd say you should do some mental accounting changes to give yourself a 6 month to 1 year Emergency Fund and to treat whatever percentage is left as part of your fixed income as your bond allocation, but to give it some term exposure, say with 5 year CDs or shorter term municipal bonds (if you've got a lot of taxable space).

inbox788
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Re: Glide path for 100% Equity Portfolio

Post by inbox788 » Fri Nov 18, 2016 3:55 pm

The first rule I learned is stocks = 100-age. Later I learned stocks = 110 - age. I found both too conservative for me and have kept higher stocks in my AA. I compare to target date funds to see how much I deviate and many of them are 90/10 or 80/20 for much of the time until age 50 or more, and I'm close enough that I don't stress.

Clive
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Re: Glide path for 100% Equity Portfolio

Post by Clive » Sun Nov 20, 2016 5:16 am

Enough in bonds to cover 10 years of withdrawals/spending. So if 2% withdrawals 20%, 3% withdrawals 30% ...etc. Don't leave it to the day you retire to buy such bonds and instead average in over the 10 years or so beforehand (or maybe buy all of bonds when you're ten years away from retirement).

Also don't over-estimate anticipated rewards. Going back to 1900 for instance it might not have been that unreasonable to initially allocate equal amounts to UK, Germany, US. As buy and hold (left as is) tends to provide similar reward outcome (but be more volatile along the way) to yearly rebalanced, such a allocation would have reflected more normal distribution, a deep left tail (Germany failed), a more flat upward sloping average middle section (UK) and a tall right tail (US). $1 original investment into each of the three saw that over the next 113 years rise to $954 (US 6.3% annualised real), $317 UK (5.23% annualised real), $0 Germany (as no rebalancing), for a combined annualised of 5.5%. Had the UK also failed then that declines to 5.2%.

Clive
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Re: Glide path for 100% Equity Portfolio

Post by Clive » Sun Nov 20, 2016 6:06 am

stemikger wrote:Below is a true life story about what happened to Taylor Larimore (one of the founders of this forum). I printed this out and keep it close to protect me from myself. As you get holder, it might be something you want to look at from time to time. Thankfully Taylor shared it, so we don't have to experience the same pain his family did. Good Luck

Our family owned "Larimore's Diner" in Foxboro, Mass. in 1929 (I was 5 years old at that time). When the depression hit, we lost the Diner and moved into my grandfather's home in Miami. Grandfather, who was a millionaire investor and chief executive of an investment trust company, lost everything--including the Miami home we lived in.

BEAR MARKET OF 1929-1937 (Dow plunged 89%)
-1929--1930--1931--1932
(-31%)(-25%)(-43%)(-08%) Large Cap Stocks
(-34%)(-35%)(-47%)(-06%) Mid/Small Cap Stocks
(-47%)(-38%)(-50%)(-05%) Micro Cap Stocks

(+04%)(+07%)(-02%)(+09%) 5-Year Treasury Bonds

BEAR MARKET OF 1973-1976 (S&P fell 43%)
-1973--1974
(-15%)(-26%) Large Caps
(-39%)(-29%) Micro Caps

---(-70%) Coca-Cola
---(-82%) Intel
---(-73%) McDonald's
---(-86%) Merrill Lynch
---(-86%) Walt Disney
---(-71%) Xerox

Figures cannot convey the horrifying and debilitating effects of a bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom talk is everywhere. Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable. Suicides increase. That's a REAL bear market.

This is why many people in retirement have 40-70% in bonds.

Best wishes.
Taylor

According to Shiller's online data in 1920 the CPI index was 19.3. by 1933 that had dropped to 12.9. Former things in 1920 cost 50% more than what they did in 1932. Another factor to consider is that during the Roaring 20's, (stock) investments typically doubled, doubled again and doubled yet again, such that a alternative view might be that the 1930's declines were just giving back some of those too much too quick 1920's gains.

Taylor's grandad who was a millionaire back in 1929, inflation adjusted to today is around 14 million. If he'd seen similar double, double again, doubled again investment rewards during the 1920's then that might have been closer to 2 million in 1920 in present day money. Given that things cost half as much in 1933 than in 1920 then 1 million 1932 relative to 2 million in 1920 would have been 'flat' in real terms, but have been down -93% compared to the 14 million peak.

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